Hedge fund called SEC probe target

Pequot investigator praised, then fired

June 23, 2006|By NEW YORK TIMES NEWS SERVICE

One of the nation's most prominent hedge funds, Pequot Capital Management Inc., is under investigation by the Securities and Exchange Commission for possible insider trading, according to government officials briefed on the case.

The SEC declined yesterday to confirm or deny that it was investigating Pequot, a $7 billion fund overseen by Arthur J. Samberg, 65, a leading money manager and philanthropist. But a lawyer who once led the agency's investigation has told Congress that the fund's trading repeatedly aroused suspicion among stock exchange officials, prompting them on 18 occasions to refer cases to the SEC for further investigation, records show.

In one instance, Pequot made $18 million by investing in companies that soon after announced a major corporate merger in July 2001, the lawyer told Congress.

The investigation has not resulted in any charges against Pequot, and the fund has denied any wrongdoing.

At the same time, the SEC's handling of the Pequot inquiry has itself come under scrutiny by Congress and the Justice Department's Office of Special Counsel, a federal agency that examines whistle-blower complaints. These officials are examining charges by Gary J. Aguirre, the SEC lawyer who ran the Pequot investigation until last summer, that senior SEC officials had backed his inquiry - including the issuance of scores of subpoenas - until he sought the testimony of an influential Wall Street executive.

Aguirre, 66, told Congress that he was fired Sept. 1, while on vacation, after losing an argument with superiors over whether he could take the executive's testimony.

Senate investigators want to know, among other things, whether political considerations played a role in the firing of Aguirre 11 days after awarding him a two-step merit pay increase and after his supervisor had praised his work on the Pequot investigation.

"His efforts have uncovered evidence of potential insider trading and possible manipulative trading by the fund," his supervisor, Robert Hanson, wrote in a performance evaluation, documents show. "He has consistently gone the extra mile, and then some."

Aguirre made his allegations in an 18-page letter to Sen. Chuck Hagel, the Nebraska Republican who is chairman of the Senate Subcommittee on Securities and Investment, and Connecticut Sen. Christopher J. Dodd, the panel's ranking Democrat. His complaints to the chairmen of two Senate committees, Richard C. Shelby of Alabama and Charles E. Grassley of Iowa, prompted them to ask SEC officials for a confidential briefing on Aguirre's allegations about the Pequot investigation.

The investigation brings the SEC to the door of one of the oldest and most powerful hedge funds in America. While the SEC has filed suit against several hedge funds in recent years, it is not known to have focused on a fund as large or as widely known as Pequot, of Westport, Conn.

It is unclear to what extent Aguirre's firing may have interrupted the inquiry, but government officials who have been briefed on the investigation say it is continuing.

Asked to comment, Jonathan Gasthalter, a Pequot spokesman said, "At all times, Pequot's securities trading has been entirely proper and not based on insider information."

Aguirre's letter to Congress did not specifically identify any of the trades. But according to government officials, the trades Aguirre said had made the fund $18 million involved one of the biggest mergers in 2001: General Electric Capital Corp.'s $5.25 billion buyout of Heller Financial, a Chicago-based lender to businesses. Heller's stock rose 50 percent the day the acquisition was announced.

Gasthalter said the fund's trades were made in "the ordinary course of the firm's business." He added that, "Nobody at Pequot was tipped by anyone regarding the Heller acquisition or any other corporate events."

The SEC's investigation and the questions surrounding it come at a time of growing concern on Capitol Hill about the power of hedge funds, which are lightly regulated investment pools that cater to wealthy individuals, as well as institutional investors, pension funds and foundations.

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